ltTFRtATl0tAl uSltFSS

SFSSl0t - 6
0ATF. 18.08.2011
Modes of Internat|ona|
8us|ness
8y
rof kakh| k Shr|vastava
Sess|on Cb[ect|ves
OAfter th|s sess|on you w||| be ab|e to comprehend
O1he facLors lnfluenclng Lhe cholce of a parLlcular
mode of lnLernaLlonal 8uslness
O1he feaLures merlLs and demerlLs of dlrecL and
lndlrecL Lrade as well as counLer Lrade
Ovarlous forms of conLracLual enLry mode
OulsLlncLlon beLween forelgn dlrecL lnvesLmenL and
forelgn porLfollo lnvesLmenL
OnaLure and forms of mergers and acqulslLlons and
Lhe moLlvaLlon behlnd such moves
OA comparaLlve plcLure of Lrade vs lul
OComparlson beLween lul and conLracLual enLry
mode
ueLermlnanLs of LnLry Mode
W A flrm adopLs varlous modes for lLs enLry lnLo
buslness LransacLlon across borders Whlch
mode a flrm should adopL depends aL leasL
upon four facLors 1he are
Subservlence of corporaLe ob[ecLlves
CorporaLe capablllLy
PosL counLry envlronmenL
ercelved 8lsk ( llrm would prefer Lo
expand lnLernaLlonally only lf Lhe beneflLs
surpass Lhe anLlclpaLed rlsks
1ypes of LnLry Mode
@rade Mode
Lxports
Lxports C|ass|f|cat|on of Lxporters
Counter @rade
Counter @rade
( ure 8arter)
W Lg kuss|a supp||ed news pr|nt and crude o||
to Ind|a for decades and |n turn Ind|a
supp||ed tea garments med|c|nes and
tobacco products to kuss|a at a
comparat|ve|y |ow pr|ce so both the
countr|es en[oyed advantage
Counter @rade ( 8uy back Agreements)
OlL ls a form of lndusLrlal counLer Lrade A buy back ls
an arrangemenL by whlch Lhe home counLry
represenLaLlve seLs up a pro[ecL ln Lhe hosL counLry
whlch has sufflclenL forelgn exchange reserves Lo
fully pay Lhe suppller for Lhe pro[ecL normally Lhe
counLer perlod ls for long Lerm varylng form 10 Lo
20 years
O1he pro[ecL amounL ls pald parLlally ln forelgn
exchange and Lhe remalnlng amounL ls pald ln klnd
usually Lhe home counLry purchases Lhe end
producL of Lhe same pro[ecL aL a comparaLlvely low
prlce 1hls can be sold ln Lhe home counLry or could
be dlverLed Lo a Lhlrd counLry ln order Lo maxlmlze
OEg. Bharat heavy Electricals (BHEL) sets
up projects in other countries. t gets partial
payments in foreign exchange and for the
balance amount it takes back tankers from
the host country and market them in any
other country as well as sell in ndia at higher
prices.
Counter @rade ( 8uy back Agreements) cont
Counter @rade
8uy back Agreements
W Another examp|e |s from UNLCL
W In s Austr|a used to se|| p|pe||ne
equ|pment re|ated mater|a| to the then
sov|et un|on so that |atter cou|d deve|op
certa|n gas f|e|ds and cou|d p|pe a part of
the output back to austr|a
W In case of deve|op|ng countr|es such
contracts arrangements are common as they
suffer from techno|ogy gap on |arge sca|e
Counter @rade 3 Counter urchase Agreement
W 1hls ls a meLhod whereln company A from CounLry
A supplles producL x Lo CounLry 8 CounLry 8 whlch
has a surplus of producL ? compensaLes by
supplylng lL Lo company A whlch flnds a markeL for
producL ? ln counLry C CounLry C sells Lhe producL z
Lo counLry u whlch has sufflclenL forelgn exchange
Lo pay for lL CounLry u can Lhen pay counLry C and
flnally counLry A collecLs paymenL rouLed Lhrough
companles 8 C 1hus purchaslng Lakes place
agalnsL supply unLll a counLry wlLh forelgn exchange
reserves ls found for LransacLlons
W Many mulLlnaLlonal companles use Lhls sysLem Lo
make large amounL of money aL every sLage of Lhe
Counter @rade
4 Deve|opfor|mport Arrangement
W Deve|op for |mport arrangements are a|so a
type of buyback arrangements where the
exporter of p|ant and mach|nery part|c|pate
|n the cap|ta| of the |mport|ng f|rm and takes
the share |n the prof|t @he ro|e of exporter |s
much more here than |n genera| buyback
agreements
Counter @rade
S IrameWork agreement
W Irame work Agreements are the |ong term
protoco| or b||atera| c|ear|ng agreement norma||y
conc|uded between government @rade |s ba|anced
after a |ong per|od of t|me as ment|oned |n the
agreement
W If the trade |s not equa| |n va|ue the debtor se||s
the agreed upon commod|ty |n the |nternat|ona|
market and the cred|tor |s pa|d off
W Ior examp|e Mex|co so|d cocoa to the Un|ted
States of Amer|ca to pay off |ts excess |mport from
Ma|ays|a (Iar Lastern Lconom|c kev|ew 3)
Mer|ts of Counter @rade
O8||atera| or counter trade has var|ous advantages
1 A good opLlon for meeLlng lmporL requlremenLs
2 Pelps sLablllze Lhe exporL earnlngs because lL
predeLermlnes Lhe slze of exporL and lmporL
3 Pelps sLablllze Lhe Lerms of Lrade
4 uue above Lwo lL encourages sLablllLy ln Lhe
developmenL process
3 Pelps ln Lrade dlverslflcaLlon
6 lL augmenLs Lhe flow of Lechnology Lo Lhe
developlng counLrles
7 lL ls long Lerm ln naLure so provldes oLher faclllLy
also
8 lL reduces Lhe neL currency ouLflow and recovers
Demer|ts of Counter @rade
W 8||atera| or counter trade has var|ous
d|sadvantages
1 lL ls agalnsL mulLllaLeral Lrade
2 Can no conLrol dlsLorLlon compleLely
3 ulfflculL Lo sell producLs are someLlmes
Lraded
4 8alanclng of Lrade poses serlous
problems
ConLracLual LnLry Modes
Contractua| Lntry Modes
IN@LkNA@ICNAL LICLNSING
OlnLernaLlonal llcenslng ls an agreemenL beLween Lhe
(llcensor generally a well developed company) and
Lhe llcensee (can be lLs own unlL locaLed as
subsldlary or a flrm locaLed abroad) over a perlod of
Llme for Lhe use of lLs lnLanglble properLy llke brand
name markeLlng knowhow blue prlnL copyrlghL
work meLhod Lechnology and manufacLurlng
deslgns and Lrademark by paylng a llcense fee lor
example Lhe 8rlLlsh Amerlcan 1obacco Company
(8A1S) has glven llcenses ln many counLrles for Lhe
manufacLure of Lhelr brand of clgareLLes 333" ln
lndla l1C ls llcensed producer of 333"
Oepsl Cola provlded a llcense Lo Pelneken of Lhe
Contractua| Lntry Modes
IN@LkNA@ICNAL LICLNSING
W lnvolvemenL of llcensor ls very less ln day Lo
day funcLlons so reLurns are comparaLlvely
low
W Llcenslng works on speclflc condlLlons llke
speclflc LerrlLory and speclflc Llme perlod of
llcense 1he llcensor ls enLlLled for such
permlsslon afLer Lhe esLabllshmenL of
commandlng poslLlon globally and has a brand
command
Contractua| Lntry Modes
IN@LkNA@ICNAL LICLNSING
@ypes of L|cense
Contractua| Lntry Modes IkANCnISING
OlL ls a Lype of llcenslng ln Lhls form of Lechnlcal
collaboraLlon Lhe franchlser ls Lhe enLranL and Lhe
franchlsee ls Lhe hosL counLry enLlLy Pere Lhe
franchlser exerclses more conLrol over franchlsee
1he franchlsor supplles Lhe maln parL of Lhe
producL and provldes Lhe followlng servlces Lo
franchlsee
O1rade marks
OCperaLlng SysLems
OroducL
O8rand name managerlal asslsLance geographlc
excluslvlLy or speclflc seL of procedures of Lhe
franchlsor for creaLlng Lhe producL ln quesLlon
Contractua| Lntry Modes
IkANCnISING
Contractua| Lntry Modes IkANCnISING
OCompany supporL sysLems such as adverLlslng
Lralnlng employees and quallLy assurance are also
lnvolved ln franchlslng
OMcuonalds ualry Cueen uomlno's lzza and klC
are well known franchlsee brands nll1 and A1LCP
have also appolnLed franchlsee ln Afrlca SouLheasL
Asla Culf counLrles and Chlna
O PoLel PllLon and MarrloLL are well known ln
operaLors ln Lhe hoLel secLor !aLla ln lndla are Lhe
naLlonal franchlsee of Mcuonalds
OAll Lhe lnvesLmenLs on premlses P8 operaLlons and
promoLlons are LoLally borne by Lhe franchlsee
O1he ob[ecLlve of franchlsor ls Lo malnLaln an
Contractua| Lntry Modes 3 MANAGLMLN@ CCN@kAC@S
W Companles wlLh low level of Lechnology and
managerlal experLlse may seek Lhe asslsLance of
forelgn counLrles A managemenL conLracL ls an
agreemenL beLween Lwo companles whereby one
company provldes managerlal and Lechnlcal
asslsLance for whlch proper moneLary
compensaLlon ls glven elLher as a flaL lumpsum
fee a percenLage of sales or a share ln proflLs
W lor example uelLa Alrllne Alr lrance and kLM offer
such servlces ln developlng counLrles Lxxon ls a
ma[or operaLor ln Lhe gulf reglon ln Lhe fleld of oll
exploraLlon
Contractua| Lntry 4 CCN@kAC@ MANUIAC@UkING
W Many companles ouLsource Lhelr producLs and
concenLraLe malnly on markeLlng operaLlons lL ls
Lhe sLraLegy Lo ldenLlfy a manufacLurlng unlL Lo
produce lLems aL a compeLlLlve prlce ln any parL of
Lhe world lor example nlke ld procurlng lLs aLhleLlc
fooLwear ln number of facLorles ln SouLh Asla
W ConLracL manufacLurlng wlLh dlmenslon ln servlce
secLor offers ample opporLunlLles for lndlan
Companles ln Lhe form of 8uslness process
CuLsourclng ( 8C) and knoledge rocess
CuLsourclng ( kC)
Contractua| Lntry Modes 4 CCN@kAC@ MAkkL@ING
W Company sLrong ln manufacLurlng may noL be
sLrong ln markeLlng lLs producLs 1hese companles
deal wlLh markeLlng and reLall ouLleLs around Lhe
world such as 1LSCC MAC?'s k MarL Wal MarL eLc
Such manufacLurlng unlLs enLer lnLo a markeLlng
agreemenL and concenLraLe more on Lhe
producLlon aL low manufacLurlng cosLs 1hermal
and lCn exchange Many lndla companles are
conLracL markeLer for Cerman based medlcal
equlpmenLs
Contractua| Lntry Modes S @UkNkL kCILC@S
OA Lurnkey pro[ecL ls an agreemenL where a company
agrees Lo consLrucL Lhe enLlre pro[ecL from concepL
Lo compleLlon lL covers everyLhlng from Lhe supply
of manpower and caplLal Lhe erecLlon of a planL as
well as Lhe lnsLallaLlon and commlsslonlng Lo Lhe
Lrlal operaLlon of a pro[ecL 1he Lurn key pro[ecL
conLracLors elLher geL a flxed fee or Lhe cosL plus
proflLs are collecLed over a perlod of Llme 1oday
lnfrasLrucLure pro[ecLs such as power planLs
alrporLs reflnerles rallway sLaLlons hlghways and
dams are consLrucLed on Lurnkey basls
Olor example 8echLel 8rown 8ovary Pyundal
MlLsublshl L1 and uaewoo are Lurnkey conLracLors
Contractua| Lntry Modes
S @UkNkL kCILC@S
W AdvanLages 1urn key pro[ecLs allows flrms Lo
speclallze ln Lhelr core compeLencles whlch
Lhey could noL have done ln Lhe absence of
such conLracLs Such conLracLs allow Lhe hosL
govL Lo obLaln world class deslgns for lLs
lnfrasLrucLure pro[ecLs
lorelgn lnvesLmenLs
lorelgn ulrecL lnvesLmenLs
W 1he flow of funds from one desLlnaLlon Lo anoLher
ls called lnvesLmenL Companles LhaL are consLanLly
lnvolved ln lnLernaLlonal buslness lnvesL Lhelr
money ln manufacLurlng and markeLlng bases
Lhrough ownershlp CurrenLly every developlng
counLry ls formulaLlng sLraLegles by offerlng ample
amounLs of lncenLlves Lo aLLracL lnvesLmenLs
W lul conLrlbuLes Lo opLlmlzaLlon of resources ln Lhe
hosL counLrles generaLlng employmenL
opporLunlLles and enhanclng Lhe sLandard of llvlng
ln Lhe hosL counLry 1he ma[or developmenL ln Lhe
hosL counLrles ls due Lo lncreased lul lul can Lake
place ln Lhe followlng forms
lorelgn ulrecL lnvesLmenLs
lorelgn lnvesLmenLs 1 ICIN@ ILN@UkL
O1wo or more flrms [oln LogeLher Lo creaLe a new
buslness enLlLy LhaL ls legally separaLe and dlsLlncL
from lLs parenL company !v are esLabllshed as
corporaLlons and owned by fundlng parLners ln Lhe
predeLermlned proporLlons
OA [olnL venLure ls a blndlng conLracL beLween Lwo
venLure parLners Lo seL up a pro[ecL elLher ln Lhe
home counLry a hosL counLry or a Lhlrd counLry ln
Lhls case boLh parLles are commlLLlng Lo [olnL rlsk
Laklng and [olnL proflL sharlng lor example Lhe 1a[
group of PoLels had [olned venLures ln 8ussla for
seLLlng up flve sLar hoLels durlng 1980s
Oaruti Suzuki, ahindra Renault etc. Kinetic
Honda, Hero Honda are other example of Joint
Venture. One more example is American otor
Corporation entered into a joint venture with
Beijing Automotive Works called Beijing Jeep to
enter Chinese arket by producing jeeps and
other vehicles.
lorelgn lnvesLmenLs 1 ICIN@ ILN@UkL cont
lorelgn lnvesLmenLs
1 ICIN@ ILN@UkL Advantages
W !v provldes large caplLal funds
W !v are sulLable for ma[or pro[ecLs
W !v lnvolve shred ownershlp so rlsk also
spreads beLween and among parLners
W A place for dlfferenL klnds of skllls
W !v makes large pro[ecLs and Lurnkey
pro[ecLs feaslble and posslble
W !v provldes synergy due Lo comblned
efforLs of varled parLles
lorelgn lnvesLmenLs
1 ICIN@ ILN@UkL D|sadvantages
W !v are poLenLlal for confllcLs
W uelay ln ueclslon maklng due Lo varled
lnLeresL and dlspuLes
W 1hls leads Lo lnefflclenL operaLlons
W osslblllLy of collapse of !v ls more due Lo
enLry of compeLlLors changes ln Lhe
buslness envlronmenL ln Lhe Lwo counLrles
and change ln Lhe parLners' sLrengLh
lorelgn lnvesLmenLs
CCLLA8CkA@ICN
W Whlle a [olnL venLure deals wlLh Lhe
compleLe pro[ecL ln flnanclal Lerms and
wlLh proporLlonaLe parLnershlp
commlLmenLs A collaboraLlon deals only
wlLh some funcLlons lor example 8a[a[
AuLo has a collaboraLlon wlLh kawasakl of
!apan who offers Lechnology for Lwo
wheelers
lorelgn lnvesLmenLs
4 MLkGLkS AND ACUISI@ICNS
W ln Lhls case a company ln Lhe hosL counLry
(domesLlc company) selecLs a forelgn company and
merges lLself wlLh Lhe forelgn company ln order Lo
enLer lnLernaLlonal buslness
W May purchase Lhe forelgn company and acqulres lLs
ownershlp and conLrol
W 1he examples are Arcelor MlLLal sLeel CemenLos
Mexlcanos AcqulslLlon of eLron CorporaLlon Lhe
largesL peLrollum reflnery ln hlllpplnes and
Ssangyong Cll 8eflnlng Company of SouLh korea by
Saudl Arabla's CovernmenL
lorelgn lnvesLmenLs
4 MLkGLkS AND ACUISI@ICNS
OWhy l8 Lhrough MA acLlvlLles?
OlL provldes lmmedlaLe access Lo lnLernaLlonal
manufacLurlng faclllLles and markeLlng neLwork lor
example rocLor and Camble enLered Mexlcan 1lssue
producLs ln 1997 by purchaslng LoreLo ? ena
robers manufacLurlng and markeLlng sysLems
O1he company lmmedlaLely geLs ownershlp and
conLrol over Lhe acqulred flrm's facLorles employees
Lechnology brand names and dlsLrlbuLlon neLworks
O1he company can formulaLes lnLernaLlonal sLraLegy
and generaLe more revenues
Olf Lhe company has already reached aL Lhe sLage of
lorelgn lnvesLmenLs
Ma[or MLkGLkS AND ACUISI@ICNS |n |nd|a
Acqu|rer @arget Company Country
targeted
Dea| va|ue (5
mn)
Industry
1aLa SLeel Corus Croup p1c uk 12000 SLeel
Plndalco novells Canada 3982 SLeel
vldeocon uaeboo LlecLronlcs
Corp
korea 729 LlecLronlcs
ur reddy's
Labs
8eLapharm Cermany 397 harmaceuLlcal
Suzlon Lnercy Pansen Croup 8elglum 363 Lnergy
PCL kenya peLroleum
8eflnery LLd
kenya 300 Cll and gas
8anvexy labs 1arapla SA 8omanla 324 harmaceuLlcal
1aLa SLeel naLsLeel Slngapore 293 SLeel
vldeocon 1homson SA lrance 290 LlecLronlcs
vSnL 1eleglobe Canada 239 1elecom
lorelgn (lul) LnLry ueclslon
Compar|son of D|fferent Modes of Lntry
Mode r|mary Advantages r|mary D|sadvantages
1 LxporLln
g
1 8elaLlvely low flnanclal
exposure
2 ermlL gradual markeL
enLry
3 Acqulre knowledge abouL
local markeL
4 Avold resLrlcLlons on
forelgn lnvesLmenL
1 vulnerable Lo Larlffs
and n18s
2 LoglsLlcal complexlLles
3 oLenLlal confllcLs
wlLh dlsLrlbuLors
2 Llcenslng 1 Low flnanclal rlsks
2 Low cosL way Lo assess
markeL poLenLlal
3 Avold Larlffs n18s
resLrlcLlons o forelgn
lnvesLmenLs
4 Llcensee provldes
knowledge of local
1 LlmlLs markeL
opporLunlLles / proflLs
2 uependence on
Llcense
3 oLenLlal confllcL wlLh
llcensee
4 May be creaLlng
fuLure compeLlLor
Compar|son of D|fferent Modes of Lntry
Mode r|mary Advantages
r|mary D|sadvantages
3
lranchlsln
g
1 Low flnanclal rlsks
2 Low cosL way Lo assess
markeL poLenLlal
3 Avold Larlffs n18s
resLrlcLlons o forelgn
lnvesLmenLs
4 MalnLaln more conLrol Lhan
llcenslng
3 Llcensee provldes knowledge
of local markeLs
1 LlmlLs markeL
opporLunlLles / proflLs
2 uependence on Llcense
3 oLenLlal confllcL wlLh
lranchlsee
4 May be creaLlng fuLure
compeLlLor
4 ConLracL
manufacLurl
ng
1 Low flnanclal rlsks
2 Mlnlmlze resources
devoLed Lo
manufacLurlng
3 locus flrm's resources
on oLher elemenLs of Lhe
value chaln
1 8educe conLrol (may
affecL quallLy dellvery
schedules eLc)
2 8educed learnlng
poLenLlals
3 oLenLlal publlc
relaLlons problems may
need Lo monlLor
Compar|son of D|fferent Modes of Lntry
Mode r|mary Advantages r|mary D|sadvantages
3 Managemen
L ConLracL
1 locus flrm's resources on lLs
area of experLlse
2 Mlnlmum flnanclal exposure
1 oLenLlal reLurns llmlLed by
conLracLs
2 May unlnLenLlonally Lransfer
proprleLary knowledge and
Lechnlques Lo conLracL
4 1urnkey
pro[ecLs
1 locus flrm's resources on lLs
area of experLlse
2 Avold all long Lerm
operaLlonal rlsks
1 8ear flnanclal rlsk ( cosL
overrun eLc)
2 8ear consLrucLlon rlsk ( delay
problems wlLh suppllers)
3 lorelgn
ulrecL
lnvesLmenL
1 Plgh proflL poLenLlal
2 MalnLaln ConLrol over
CperaLlons
3 Acqulre knowledge of local
markeL
4 Avold Larlffs and nl8s
1 Plgh flnanclal and
managerlal lnvesLmenLs
2 Plgh exposure Lo pollLlcal
rlsk vulnerable Lo
resLrlcLlons on forelgn
lnvesLmenL
3 CreaLer managerlal
complexlLy
luncLlonal Alllances